The structured-products industry is taking its message directly to consumers with coordinated marketing and educational efforts designed to demystify the often-complex, intermediary-sold alternative investments.
NEW YORK — The structured-products industry is taking its message directly to consumers with coordinated marketing and educational efforts designed to demystify the often-complex, intermediary-sold alternative investments.
For financial advisers, this ultimately could mean increased investor demand for an investment category they themselves still are trying to figure out.
“Advisers need to know what a structured product is, because consumers are already hearing and reading about these kinds of alternative investments,” said John Visconti, a senior financial adviser with UNFCU Financial Advisors in New York.
Lehman on board
Despite a 33% increase in sales last year to a record $64 billion, the industry, as represented by the Structured Products Association, is stepping back from a strictly wholesale-oriented focus to concentrate on creating more investor demand.
To that end, the three-year-old New York-based trade group already has introduced a “nomenclature initiative” to encourage the more than two-dozen investment banks that provide a broad range of structured products to at least use consistent language when naming the products.
Lehman Brothers Inc. in New York has emerged as the first firm to adopt the nomenclature standards.
“If we can’t agree on what we’re calling the various types of customized investments, we can’t expect advisers and investors to understand this industry,” said Alli McCartney, vice president of structured-equity sales at Lehman Brothers. “These nomenclature standards take an industry that has been based on acronyms to a point where we’re all speaking the same language.”
At its annual conference here last week, the SPA announced a partnership with the New York Stock Exchange that is designed to bring the structured-products message directly to investors through a multimedia educational program beginning this summer.
The program, “The Informed Investor Initiative,” will be geared toward consumer education with regard to structured products and will be accessible through the websites of the association and the stock exchange.
“This industry needs to stop just pushing products [through financial intermediaries], and they need to start talking in plain English,” said Keith Styrcula, founder and president of the SPA. “The sales will follow if people understand the products.”
The ultimate goal of what he described as a multistep educational and marketing evolution is to get to the point where brokers and advisers can explain a structured product to a client in 60 seconds.
Structured products generally involve the use of derivatives to provide investors with a specific balance of capital protection, income generation and capital appreciation. They have fixed maturities, and the condition of each product also is fixed in advance.
“There is no question this industry needs education, and we’ve got a lot of work to do,” said Tom Ricketts, chief executive of Incapital LLC, a Chicago-based investment banking firm that created a website geared toward investor education.
Beyond the traditional approach of using wholesalers to deliver the message to brokers and financial advisers, the industry has come to realize that it might be able to expedite the process by helping investors better understand how structured products fit into an overall portfolio.
“The industry needs people to understand what they’re buying and how that fits into the context of a portfolio,” Mr. Ricketts said. “The last thing we want is people coming to the market once, getting frustrated and then leaving.”
An underlying theme of last week’s conference was to take a hard look at issues and challenges the industry faces as it continues to home in on retail-class investors, Mr. Styrcula said.
A key component of investor education is getting the investment banks to move beyond branding, jargon and a laundry list of acronyms and adopt a more straightforward universal language, he said.
One example from the conference of the need for nomenclature standards is a basic structured product linked to an equity or commodity index that offers leveraged upside exposure and no downside protection. At Goldman Sachs Group Inc. in New York, this is called an “enhanced participation note”; at Merrill Lynch & Co. Inc. in New York, it is an “accelerated return note”; and at Zurich, Switzerland-based UBS AG, it is sold as a “return optimization security.”
Under the nomenclature initiative, product providers follow a six-step process to determine an appropriate and consistent name for products they develop.
But getting the product providers to move beyond their own branding efforts to think in the interest of the overall industry is only one part of the process of moving structured products into the mainstream, according to Mr. Styrcula.
“We see this as a multistep process,” he said. “The nomenclature initiative creates a consistent vocabulary, and when we start moving toward what-you-see-is-what-you-get, that will start to demystify structured products.”
Another step along those lines involves the adoption of the so-called free-writing prospectus, which is a wrapper around a lengthier prospectus that sums up the risks and rewards of the particular investment.
Meanwhile, as the industry moves toward the retail market, it also attracts more of the regulatory spotlight.
“Whenever there’s a huge market, regulators will take note, and they are taking note of this market,” said Mary Ann Gadziala, associate director in the office of compliance inspections and examinations at the Securities and Exchange Commission.
“This is an important, dynamic and growing market,” she said. “And we have been looking at retail sales.”
